UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-8038

KEY ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)

Maryland 04-2648081
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

Two Tower Center, Tenth Floor, East Brunswick, NJ 08816
(Address of Principal executive offices) (ZIP Code)

Registrant's telephone number including area code: (908) 247-4822

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No

Indicate by check mark whether the registrant has filed documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court since there was a distribution of securities under a plan confirmed by a
court. Yes X No

Common Shares outstanding at February 13, 1997: 11,658,131

KEY ENERGY GROUP, INC. AND SUBSIDIARIES

INDEX
Page
Number

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements 3

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11

PART II. OTHER INFORMATION

Item 1. Legal Proceedings. 20

Item 2. Changes in Securities. 20

Item 3. Defaults Upon Senior Securities. 20

Item 4. Submission of Matters to a Vote of Security Holders. 20

Item 6. Exhibits and Reports on Form 8-K. 20

Signatures. 23

- 2 -

Key Energy Group, Inc. and Subsidiaries
Consolidated Balance Sheet

December 31, June 30,
(Thousands, except share and per share data) 1996 1996
- ----------------------------------------------------------------------------------------------------------

ASSETS
Current Assets:
Cash ........................................................................ $ 9,283 $ 3,240
Restricted cash ............................................................. 1,629 971
Accounts receivable, net .................................................... 27,373 20,570
Inventories ................................................................. 1,942 1,957
Prepaid expenses and other current assets ................................... 928 743
-------- ---------
Total Current Assets .......................................................... 41,155 27,481
-------- ---------
Property and Equipment:
Oilfield service equipment .................................................. 104,450 66,432
Oil and gas well drilling equipment ......................................... 5,455 4,862
Motor vehicles .............................................................. 1,260 1,159
Oil and gas properties and other related equipment, successful efforts method 18,960 17,663
Furniture and equipment ..................................................... 921 716
Buildings and land .......................................................... 5,339 5,295
--------- ---------
136,385 96,127
Accumulated depreciation & depletion ............................................ (12,983) (8,920)
--------- ---------
Net Property and Equipment ...................................................... 123,402 87,207
--------- ---------
Other Assets .................................................................. 10,396 7,034
--------- ---------

Total Assets .................................................................. $ 174,953 $ 121,722
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................................ $ 13,318 $ 11,086
Other accrued liabilities ................................................... 8,830 11,002
Accrued interest ............................................................ 134 417
Accrued income taxes ........................................................ 118 53
Deferred tax liability ...................................................... 310 310
Current portion of long-term debt ........................................... 1,351 1,471
--------- ---------
Total Current Liabilities ..................................................... 24,061 24,339
--------- ---------
Long-term debt, less current portion .......................................... 75,452 45,354
Non-current accrued expenses .................................................. 4,909 4,909
Deferred income taxes ......................................................... 11,583 4,244
Minority interest ............................................................. 1,260 1,252

Stockholders' equity:
Common stock, $.10 par value; 25,000,000
shares authorized, 11,483,131 and 10,413,513 shares issued and
outstanding at December 31, 1996 and June 30, 1996, respectively ......... 1,148 1,041
Additional paid-in capital .................................................. 45,123 32,763
Retained earnings ........................................................... 11,417 7,820
-------- ---------
Total Stockholders' Equity .................................................... 57,688 41,624
-------- ---------

Total Liabilities and Stockholders' Equity .................................... $ 174,953 $ 121,722
======= =========

See the accompanying notes which are an integral part of these consolidated
financial statements.

- 3 -

Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Operations

Three Six
Months Ended Months Ended
December 31, December 31,
(Thousands, except per share data) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------

Oilfield services ............................. $ 31,708 $ 9,381 $ 59,019 $ 19,148
Oil and gas ................................... 2,088 911 3,613 1,727
Oil and gas well drilling ..................... 2,359 2,057 4,683 3,659
Other revenues, net ........................... 42 45 344 258
-------- -------- -------- --------
36,197 12,394 67,659 24,792
-------- -------- -------- --------
COSTS AND EXPENSES:
Oilfield services ............................. 23,066 6,889 42,766 14,153
Oil and gas ................................... 773 354 1,286 619
Oil and gas well drilling ..................... 1,963 1,388 3,844 2,735
Depreciation, depletion and amortization ...... 2,342 971 4,437 1,794
General and administrative .................... 3,735 1,198 7,262 2,390
Interest ...................................... 1,296 439 2,646 877
-------- -------- -------- --------
33,175 11,239 62,241 22,568
-------- -------- -------- --------

Income before income taxes and minority interest . 3,022 1,155 5,418 2,224
Income tax expense ............................... 1,029 387 1,813 730
Minority interest in net income .................. (50) - 8 -
-------- -------- -------- --------

NET INCOME ....................................... $ 2,043 $ 768 $ 3,597 $ 1,494
======== ======== ======== ========

EARNINGS PER SHARE:

Primary:
Income before income taxes and minority interest $ 0.26 $ 0.17 $ 0.48 $ 0.32
Net income ..................................... $ 0.18 $ 0.11 $ 0.32 $ 0.22

Assuming full dilution:
Income before income taxes and minority interest $ 0.24 $ 0.17 $ 0.44 $ 0.32
Net income ..................................... $ 0.16 $ 0.11 $ 0.29 $ 0.22

WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary .......................................... 11,634 6,914 11,286 6,914
Assuming full dilution ........................... 17,027 6,914 16,813 6,914

See the accompanying notes which are an integral part of these consolidated
financial statements.

- 4 -

Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

Three Six
Months Ended Months Ended
December 31, December 31,
(Thousands) 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $ 2,043 $ 768 $ 3,597 $ 1,494
Adjustments to reconcile income from operations to
net cash provided (used) by operations:
Depreciation, depletion and amortization .................. 2,342 971 4,437 1,794
Deferred income taxes ..................................... 1,029 387 1,813 730
Minority interest in net income ........................... (50) - 8 -
Change in assets and liabilities net of effects from acquisitions:
(Increase) decrease in accounts receivable .............. (1,761) 279 (3,673) (219)
(Increase) decrease in other current assets ............. 352 (21) (97) 90
Decrease in accounts payable and accrued expenses ....... (3,922) (533) (3,069) (807)
Increase (decrease) in accrued interest ................. (947) 10 (283) 23
Other assets and liabilities ............................ (175) (50) (806) (59)
--------- --------- --------- --------
Net cash provided (used) by operating activities ......... (1,089) 1,811 1,927 3,046
--------- --------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - Oilwell service operations ......... (3,049) (841) (5,949) (1,727)
Capital expenditures - Oil and gas operations ............. (975) - (1,016) (7)
Capital expenditures - Oil and gas well drilling operations (268) (220) (591) (360)
Cash received in acquisitions ............................. 50 - 50 -
Acquisitions - oilwell service operations ................. (13,278) - (13,278) -
Expenditures for oil and gas properties ................... - (1,236) (281) (2,150)
--------- --------- --------- --------
Net cash used in investing activities ..................... (17,520) (2,297) (21,065) (4,244)
--------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt ................................ (154) (514) (1,053) (1,418)
Borrowings (payments) under line-of-credit ................ 368 38 1,307 (28)
Proceeds from exercised stock options ..................... - - 58 -
Proceeds from long-term debenture, net .................... - - 50,440 -
Repayment of long-term debt ............................... - - (35,413) -
Proceeds from long-term debt - other ...................... 10,500 1,019 10,500 2,324
--------- --------- --------- --------
Net cash provided by financing activities ................. 10,714 543 25,839 878
--------- --------- --------- --------
Net increase (decrease) in cash and restricted cash ....... (7,895) 57 6,701 (320)
Cash and restricted cash at beginning of period ........... 18,807 898 4,211 1,275
--------- --------- --------- --------
Cash and restricted cash at end of period ................. $ 10,912 $ 955 $ 10,912 $ 955
========= ========= ========= ========

Supplemental cash flow disclosures:
Interest paid ............................................. $ 2,243 $ 429 $ 2,929 $ 854

See the accompanying notes which are an integral part of these consolidated
financial statements.

- 5 -

Key Energy Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

The consolidated financial information in this report includes the accounts of
Key Energy Group, Inc. (the "Company") and its wholly-owned subsidiaries and was
prepared in conformity with accounting policies used in the Annual Report on
Form 10-K furnished for the preceding fiscal year.

As of February 13, 1997, the Company operates 392 well service and workover
rigs, which is the third largest fleet of well service and workover rigs in the
United States. The Company operates in Texas, Oklahoma, New Mexico, Michigan,
the Appalachian Basin and Argentina and is a leader in each of its domestic
markets. The Company generally provides a full range of maintenance and workover
rig services to oil and gas producers in each of its operating regions. These
services include the completion of newly drilled wells, the recompletion of
existing wells (including horizontal recompletions) and the plugging and
abandonment of wells at the end of their useful lives. Other services include
hot oiling, oil field liquid transportation, storage and disposal, and fishing
tools and services. The Company also is engages in the production of oil and
natural gas and contract drilling in the Permian Basin of West Texas.

The Company conducts its operations primarily through four wholly-owned
subsidiaries: Yale E. Key, Inc. ("Yale E. Key"); WellTech Eastern, Inc.
("WellTech Eastern"); Odessa Exploration Incorporated ("Odessa Exploration");
and Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling ("Clint Hurt"). In
addition, Key operates in Argentina through its 63% ownership in Servicios
WellTech, S.A. ("Servicios"). WellTech Eastern operates through two divisions;
WellTech Mid-Continent Division and WellTech Eastern Division. Yale E. Key,
WellTech Eastern and Servicios provide oil and gas well services. Odessa
Exploration is engaged in the production of oil and gas and Clint Hurt provides
contract oil and gas well drilling services.

In July 1996, the Company completed the offering of $52,000,000 of 7%
convertible subordinated debentures due 2003 (the "Offering"). The Offering was
a private offering pursuant to Rule 144A under the Securities Act of 1933, as
amended (the "Securities Act"). Proceeds from the Offering were used to
substantially repay existing long-term debt (approximately $35.4 million). The
remaining proceeds, together with proceeds from borrowings under existing credit
arrangements, were used to fund the expansion of the Company's operations
through acquisitions of businesses and assets and for working capital and
general corporate purposes. See Note 3 for a more detailed description of the
Offering.

Odessa Exploration utilizes the successful efforts method of accounting for its
oil and gas properties. Under this method, all costs associated with productive
wells and nonproductive development wells are capitalized, while nonproductive
exploration costs and geological and geophysical costs (if any), are expensed.
Capitalized costs relating to proved properties are depleted using the
unit-of-production method based on proved reserves
expressed as net equivalent barrels as reviewed by independent petroleum
engineers. The carrying amounts of properties sold or otherwise disposed of and
the related allowance for depletion are eliminated from the accounts and any
gain/loss is included in results of operations.

- 6 -

Odessa Exploration's aggregate oil and gas properties are stated at cost, not in
excess of total estimated future net revenues net of related income tax effects.

In the opinion of the Company, the accompanying unaudited condensed consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position as of December 31, 1996, the statement of
cash flows for the three and six months ended December 31, 1996 and 1995, and
the results of operations for the three and six month periods then ended.

2. BUSINESS AND PROPERTY ACQUISITIONS

Since September 30, 1996, the Company has completed eight acquisitions of
unrelated oil and gas well service businesses.

Acquisitions Completed after December 31, 1996

Cobra Industries, Inc.

Effective as of January 13, 1997, the Company completed the purchase of
Cobra Industries, Inc. ("Cobra") for $5 million in cash and 175,000 shares of
the Company's common stock. Cobra operates 26 oilwell service rigs in
southeastern New Mexico.

Oklahoma Trucking and Well Service Rigs.

Effective as of January 7, 1997, the Company completed the acquisition of
the assets of an Oklahoma trucking and well service company (the "Seller") for
$2.7 million in cash. The Seller operated three oilwell service rigs, 21 trucks
and related fluid transportation and disposal assets in Oklahoma, which assets
are currently operated by the WellTech Mid-Continent Division of WellTech
Eastern.

Acquisitions Completed During the Three-Months Ended December 31, 1996

Woodward Well Service, Inc.

Effective as of October 1, 1996, the Company completed the acquisition of
Woodward Well Service, Inc. ("Woodward") for 75,000 shares of the Company's
common stock and approxiately $100,000 in cash, most of which is payable over a
four-year period. Woodward operated five oilwell service units and a fishing
tool business in Oklahoma, which operations are currently conducted by the
WellTech Mid-Continent Division of WellTech Eastern. The acquisition was
accounted for using the purchase method.

Hitwell Surveys, Inc.

Effective as of December 2, 1996, the Company completed the purchase of
Hitwell Surveys, Inc. ("Hitwell") for approximately $1.3 million in cash.
Hitwell operates eight oilwell logging and perforating trucks in the Appalachian
Basin and Michigan. The acquisition was accounted for using the purchase method.

Brooks Well Servicing, Inc.

Effective as of December 4, 1996, the Company completed the acquisition of
Brooks Well Servicing, Inc. ("Brooks") for 917,500 shares of the Company's
common stock. Brooks was a wholly-owned subsidiary of Hunt Oil Company and
operated 32 oilwell service rigs and ancillary equipment in east Texas, which
operations are currently conducted by the WellTech Mid-Continent Division of
WellTech Eastern. The acquisition was accounted for using the purchase method.

- 7 -

Brownlee Well Service Inc.

Effective as of October 24, 1996, the Company completed the purchase of
Brownlee Well Service, Inc. ("Brownlee") and Integrity Fishing and Rental Tools
Inc. ("Integrity"). Consideration for the acquisition was $6.5 million in cash
and 61,069 shares of the Company's common stock. Brownlee and Integrity operate
16 oilwell service rigs with ancillary equipment and a variety of oilfield
fishing tools in west Texas. The acquisition was accounted for using the
purchase method.

B & L Hotshot, Inc.

Effective as of December 13, 1996, the Company completed the acquisition of
B&L Hotshot, Inc. and affiliated entities ("B&L") for $4.9 million in cash. B&L
provides trucking and related services for oil and natural gas wells in
Michigan, which operations are currently conducted by the WellTech Eastern
Division of WellTech Eastern. The acquisition was accounted for using the
purchase method.

Energy Air Drilling Services Co.

Effective as of November 1, 1996, the Company completed the acquisition
of certain assets of Energy Air Drilling Services Co. ("Energy Air") for
$500,000 in cash and 4,386 shares of the Company's common stock. Energy Air
operated four air drilling packages in west Texas, which operations are
currently conducted by Yale E. Key. The acquisition was accounted for using the
purchase method.

Prior Acquisitions

WellTech, Inc.

On March 26, 1996, the Company completed the merger of WellTech, Inc.
("WellTech") into the Company. The net consideration for the merger was
3,500,000 shares of the Company's common stock and warrants to purchase 500,000
additional shares of Common Stock at an exercise price of $6.75 per share.
WellTech conducted oil and gas well servicing operations in the Mid-Continent
and Northeast areas of the United States and in Argentina. The acquisition was
accounted for using the purchase method.

Odessa Exploration Properties

In April of 1996, Odessa Exploration purchased approximately $6.9 million
in cash of oil and gas producing properties from an unrelated company proceeds
from bank borrowings, which indebtedness was subsequently repaid (See Note 3).
The acquisition was accounted for using the purchase method.

3. LONG-TERM DEBT

7% Convertible Subordinated Debentures

In July 1996, the Company completed the offering of $52,000,000 of 7%
convertible subordinated debentures due 2003 (the "Offering"). The Offering was
a private offering pursuant to Rule 144A under the Securities Act. Gross
proceeds from the Offering were $52,000,000 and were used to substantially repay
existing long-term debt (approximately $35.4 million). The remaining proceeds
were used to fund the expansion of the Company's operations through acquisitions
of businesses and assets, for working capital and general corporate purposes.

- 8 -

The long-term debt that was repaid with proceeds from the Offering consisted
of (i) indebtedness under the term notes with CIT Group/Credit Finance, Inc.
("CIT") aggregating approximately $21.2 million and (ii) all indebtedness owed
by Odessa Exploration to Norwest Bank Texas, N.A. ("Norwest") totaling
approximately $14.2 million.

The Debentures mature on July 1, 2003 and are convertible at any time after
November 1, 1996 and before maturity, unless previously redeemed, into shares of
the Company's common stock at a conversion price of $9 3/4 per share, subject to
adjustment in certain events. In addition, holders of the Debentures who convert
prior to July 1, 1999 will receive, in addition to the Company's common stock, a
payment generally equal to 50% of the interest otherwise payable on the
converted Debentures from the date of conversion through July 1, 1999, payable
in cash or common stock, at the Company's option. Interest on the Debentures is
payable semi-annually on January 1 and July 1 of each year, commencing January
1, 1997.

The Debentures are not redeemable before July 15, 1999. Thereafter, the
Debentures will be redeemable at the option of the Company in whole or part, at
the declining redemption prices set forth in the original Debenture prospectus,
together with accrued and unpaid interest thereon. The Debentures also may be
redeemed at the option of the holder if there is a change in control (as defined
in the original Debenture prospectus) at 100% of their principal amount,
together with accrued and unpaid interest thereon.

Pursuant to the terms of the Indenture governing the rights of the holders
of the Offering, the Company was required to obtain Servicios' guarantee of the
Company's indebtedness under the Offering and agreed to increase the interest
rate payable on the Offering to 7 1/2% in the event such guarantee was not
obtained. To date, such guaranty has not been obtained, and, therefore, the
Offering is currently accruing interest at a rate of 7 1/2%. The Company made
its first interest payment on December 31, 1996.

Other Long-term Debt

In November 1996, the Company completed the renegotiation of its credit
facilities with CIT consisting of a line of credit and a term loan for each of
WellTech Eastern, Yale E. Key and Clint Hurt. The renegotiated term and credit
facilities include a maximum credit availability of the lesser of (i) $40
million, or (ii) an amount subject to certain asset valuations determined by
CIT. Also, the renegoitiated term and credit facilities include an interest rate
at one-half percent above the stated prime rate, which was 8.25% at December 31,
1996, an extension of the maturity dates and a decrease in prepayment
penalties.

The CIT line of credit, as amended, ($11,058,000 approximate balance at December
31, 1996) requires monthly payments of interest and is collateralized by the
accounts receivable of Yale E. Key, Clint Hurt and WellTech Eastern. At December
31, 1996, there was no credit line availability.

The CIT note, as amended, ($10,500,000 approximate balance at December 31, 1996)
requires monthly payments of interest and is collateralized by all of the assets
of Yale E. Key, Clint Hurt and WellTech Eastern. At December 31, 1996, there was
approximately $8.9 million in unused term loan.

In addition to the CIT credit facilities, Odessa Exploration has funded its
operations and acquisitions in part through a credit facility with Norwest. All

- 9 -

amounts previously owed by Odessa Exploration under the Norwest facility were
paid using a portion of the proceeds from the Offering. Effective as of January
31, 1997, Odessa Exploration completed the renegotiation of the Norwest credit
facility, which, among other things, increased its borrowing base to $18
million, none of which has been advanced as of February 13, 1997.

4. IMPAIRMENT OF LONG-LIVED ASSETS

The Company adopted FAS 121 effective as of July 1, 1996. FAS 121 requires that
long-lived assets held and used by an entity, including oil and gas properties
accounted for under the successful efforts method of accounting, be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Long-lived assets to be
disposed of are to be accounted for at the lower of carrying amount or fair
value less cost to sell when management has committed to a plan to dispose of
the assets. All companies, including successful efforts oil and gas companies,
are required to adopt FAS 121 for fiscal years beginning after December 15,
1995.

In order to determine whether an impairment had occurred, the Company estimated
the expected future cash flows of its oil and gas properties and compared such
future cash flows to the carrying amount of the oil and

gas properties to determine if the carrying amount was recoverable. Based on
this process, no writedown in the carrying amount of the Company's proved
properties was necessary at December 31, 1996.

5. COMMITMENTS AND CONTINGENCIES

Various suits and claims arising in the ordinary course of business are pending
against the Company. Management does not believe that the disposition of any of
these items will result in a material adverse impact to the consolidated
financial position of the Company.

- 10 -

KEY ENERGY GROUP, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.

The following discussion and analysis should be read in conjunction with the
Company's audited 10-K for the year ended June 30, 1996.

Since 1993, the Company has made a number of acquisitions, or is in the process
thereof, which have significantly expanded the Company's operations:

Acquisitions Completed after December 31, 1996

* Cobra Industries, Inc.

Effective as of January 13, 1997, the Company completed the purchase of
Cobra Industries, Inc.("Cobra") for $5 million in cash and 175,000 shares of the
Company's common stock. Cobra operates 26 oilwell service rigs in southeastern
New Mexico.

* Oklahoma Trucking and Well Service Rigs.

Acquisitions Completed During the Three-Months Ended December 31, 1996

* Woodward Well Service, Inc.

* Hitwell Surveys, Inc.

* Brooks Well Servicing, Inc.

- 11 -

* Brownlee Well Service Inc.

* B & L Hotshot, Inc.

* Energy Air Drilling Services Co.

Effective as of November 1, 1996, the Company completed the acquisition of
certain assets of Energy Air Drilling Services Co. ("Energy Air") for $500,000
in cash and 4,386 shares of the Company's common stock. Energy Air operated four
air drilling packages in west Texas, which operations are currently conducted by
Yale E. Key. The acquisition was accounted for using the purchase method.

Prior Acquisitions

* WellTech, Inc.

* Odessa Exploration Properties

Other Recent Developments

In July 1996, the Company completed the offering of $52,000,000 of 7%
convertible subordinated debentures due 2003 (the "Offering"). The Offering was
a private offering pursuant to Rule 144A under the Securities Act. Net proceeds
from the Offering were used substantially to repay existing long-term debt
(approximately $35.4 million). The remaining proceeds, together with proceeds
from borrowings under existing credit arrangements, were used to fund the
expansion of the Company's operations through acquisitions of businesses and
assets and for working capital and general corporate purposes. See Note 3 to the
Financial Statements for a more detailed description, (including an increase in
the interest rate), of the Offering.

- 12 -

RESULTS OF OPERATIONS

QUARTER ENDED DECEMBER 31, 1996 VERSUS QUARTER ENDED DECEMBER 31, 1995

The following discussion provides information to assist in the understanding of
the Company's financial condition and results of operations. It should be read
in conjunction with the financial statements and related notes appearing
elsewhere in this report.

Operating results for the quarter ended December 31, 1996 include the
Company's oilfield well service operations conducted by its wholly-owned
subsidiaries, Yale E. Key, Inc. ("Yale E. Key") and WellTech Eastern, Inc.,
("WellTech Eastern"), its oil and natural gas exploration and production
operations conducted by its wholly-owned subsidiary, Odessa Exploration, Inc.
("Odessa Exploration") and Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling
("Clint Hurt Drilling") which is engaged in oil and natural gas well contract
drilling. In addition, the Company conducts oilfield services in Argentina
through its 63% ownership in Servicios WellTech, S.A. ("Servicios"), an
Argentinean corporation.

Historically, fluctuations in oilfield well service operations and oil and gas
well contract drilling activity have been closely linked to fluctuations in
crude oil and natural gas prices. However, the Company, through acquisitions,
customer alliances and agreements, and diversification of services, seeks to
minimize the effects of such fluctuations on the Company's results of operations
and financial condition.

The Company

Revenues of the Company for the quarter ended December 31, 1996 increased
$23,803,000 or 192% to $36,197,000 from $12,394,000 for the quarter ended
December 31, 1995, while net income of $2,043,000 represented an increase
$1,275,000, or 166%, from the 1995 quarter total of $768,000. The increase in
revenues was primarily due to the increased oil and gas revenues from Odessa
Exploration, increased oilwell service equipment utilization, the acquisition of
the WellTech Eastern operations from the date of acquisition of March 26, 1996
and the additional oilfield service acquisitions acquired (see Note 2 ). The
increase in quarterly 1996 net income over the quarterly 1995 net income is
partially attributable to the acquisition of WellTech and the other recent
acquisitions, but is also a result of an increase in oilwell service equipment
utilization and a decrease in total consolidated Company costs and expenses as a
percentage of total revenues.

Oilfield Services

The Company's oilfield services operations are performed primarily by Yale
E. Key and WellTech Eastern. Yale E. Key conducts oilfield services in west
Texas, while WellTech Eastern conducts oilfield services in the mid-continent
region of the United States (primarily in Oklahoma and east Texas) through its
WellTech Mid-Continent Division, and in the northeastern United States
(primarily in Michigan, Pennsylvania and West Virginia) through its WellTech
Eastern Division. The Company conducts oilfield services in Argentina through
its indirect 63% ownership in Servicios.

Oilfield service revenues increased $22,327,000, or 238%, from $9,381,000 for
the 1995 quarter to $31,708,000 for the 1996 quarter. The increase in revenues
is primarily attributable to higher equipment utilization as the result of an
increase in demand for oilfield services and the acquisition of WellTech
Eastern, and other smaller recent acquisitions, whose operating results are
included for the current quarter but not for the comparable 1995 quarter. In
addition, Yale E. Key diversified oilfield services into higher margin business
segments such as oilfield frac tanks, oilfield fishing tools and trucking
operations.

- 13 -

Oilfield service expenses increased $16,177,000, or 234%, from $6,889,000
for the 1995 quarter to $23,066,000 for the current 1996 quarter. The increase
was due primarily to the acquisition of WellTech on March 26, 1996, other
smaller recent acquisitions and the increased demand for oilfield services. In
addition, the Company has continued to expand its services, offering ancillary
services and equipment such as oilwell fishing tools, blow-out preventers and
oilwell frac tanks.

Oil and Natural Gas Exploration and Production

The Company's oil and natural gas exploration and production operations are
conducted by Odessa Exploration. Revenues from oil and gas activities increased
$1,177,000, or 129%, from $911,000 during the quarter ended December 31, 1995 to
$2,088,000 for the current quarter. The increase in revenues was primarily the
result of increased production of oil and natural gas as several oil and natural
gas wells which were drilled began production during 1996, higher oil and
natural gas prices for the current year, and the April 1996 purchase of $6.9
million of oil and gas properties from an unrelated third party, which almost
doubled the number of oil and gas wells owned and/or operated by Odessa
Exploration.

Of the total $2,088,000 of revenues for the quarter ended December 31, 1996,
approximately $1,773,000 was from the sale of oil and gas - 37,157 barrels of
oil at an average price of $25.03 per barrel and 272,283 MCF of natural gas at
an average price of $3.09 per MCF. The remaining $315,000 of revenues
represented primarily administrative fee income and other miscellaneous income.

Expenses related to oil and gas activities increased $419,000, or 118%, from
$354,000 for the 1995 quarter to $773,000 for current 1996 quarter. The increase
in expenses was primarily the result of increased production of oil and natural
gas as several oil and natural gas wells which were drilled began production
during 1996 and the April 1996 purchase of $6.9 million in oil and gas
properties.

Oil and Natural Gas Well Drilling

The Company's oil and natural gas well drilling operations are conducted by
Clint Hurt Drilling. Oil and natural gas well drilling revenues increased
$302,000, or 15%, from $2,057,000 for the 1995 quarter to $2,359,000 for the
1996 quarter. The increase in revenues is primarily attributable to higher
equipment utilization and an increase pricing structure. In addition, two
drilling rigs were acquired in the March 1996 merger with WellTech.

Expenses related to oil and natural gas well drilling activities increased
$575,000, or 41%, from $1,388,000 for the 1995 quarter to $1,963,000 for current
1996 quarter. The increase in expenses is attributable to higher equipment
utilization and the addition of two drilling rigs as the result of the WellTech
merger.

Interest Expense

Interest expense increased $857,000, or 195%, to $1,296,000 for the current
1996 quarter from $439,000 for the 1995 comparable quarter. The increase was
primarily the result of the issuance of $52 million in principal amount of 7 %
Convertible Subordinated Debentures, (see Note 3).

General and Administrative Expenses

General and administrative expenses are comprised of the Company's and all
subsidiaries general and administrative expenses. These expenses increased
$2,537,000, or 212%, to $3,735,000 for the current 1996 quarter from $1,198,000
for the comparable 1995 quarter. The increase was primarily attributable to the
Company's recent acquisitions and expanded services.

- 14 -

Depreciation, Depletion and Amortization Expense

Depreciation, depletion and amortization expense increased $1,371,000, or 141%,
to $2,342,000 for the current 1996 quarter from $971,000 for the comparable 1995
quarter. The increase is primarily due to oilfield service depreciation expense,
which is the result of increased oilfield service capital expenditures for the
current period versus the prior period and the acquisition of WellTech. In
addition, depletion expense increased for the period due to the increase in the
production of oil and natural gas.

Income Taxes

Income tax expense of $1,029,000 for current 1996 quarter increased from
$387,000 in income tax expense for the comparable 1995 quarter. The increase in
income taxes is primarily due to the increases in operating income. However, the
Company does not expect to be required to remit a significant amount of the
$1,029,000 in total federal income taxes for fiscal year 1997, because of the
availability of net operating loss carryforwards, accelerated depreciation and
drilling tax credits.

Cash Flow

Net cash used by operating activities was $1,089,000 compared to $1,811,000 in
net cash provided during the comparable 1995 quarter. The decrease is
attributable primarily to increases in accounts receivable and a decrease in
accounts payable and accrued expenses.

Net cash used in investing activities increased from $2,297,000 for the
comparable 1995 quarter to $17,520,000 for the current 1996 quarter. The
increase is primarily the result of increased capital expenditures for oilwell
service operations as well as the Company's recent acquisitions (see Note 2 to
the Financial Statements).

Net cash provided by financing activities was $10,714,000 for the current 1996
quarter as compared to $543,000 in net cash provided by financing activities for
the comparable 1995 quarter. The increase is primarily the result of the
proceeds from other long-term debt.

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SIX MONTHS ENDED DECEMBER 31, 1996 VERSUS SIX MONTHS ENDED DECEMBER 31, 1995

The Company

Revenues of the Company for the six months ended December 31, 1996
increased $42,867,000, or 173%, to $67,659,000 from $24,792,000 for the six
months ended December 31, 1995, while net income of $3,597,000 represented an
increase of $2,103,000 or, 141%, from the 1995 total of $1,494,000. The increase
in revenues was primarily due to the increased oil and gas revenues from Odessa
Exploration, increased oilwell service equipment utilization, the acquisition of
the WellTech Eastern operations from the date of acquisition of March 26, 1996
and the additional oilfield service acquisitions acquired (see Note 2 ). The
increase in 1996 net income over the 1995 net income is partially attributable
to the acquisition of WellTech and the other recent acquisitions, but is also a
result of an increase in oilwell service equipment utilization and a decrease in
total consolidated Company costs and expenses as a percentage of total revenues.

Oilfield Services

Oilfield service revenues increased $39,871,000, or 208%, from $19,148,000
for the 1995 period to $59,019,000 for the 1996 six month period. The increase
in revenues is primarily attributable to higher equipment utilization as the
result of an increase in demand for oilfield services and the acquisition of
WellTech Eastern, and other smaller acquisitions, whose operating results are
included for the current period but not for the comparable 1995 period. In
addition, Yale E. Key diversified oilfield services into higher margin business
segments such as oilfield frac tanks, oilfield fishing tools and trucking
operations.

Oilfield service expenses increased $28,613,000, or 202%, from $14,153,000
for the 1995 six month period to $42,766,000 for the current 1996 comparable
period. The increase was due primarily to the acquisition of WellTech on March
26, 1996, other recent acquisitions and the increased demand for oilfield
services. In addition, the Company has continued to expand its services,
offering ancillary services and equipment such as oilwell fishing tools,
blow-out preventers and oilwell frac tanks.

Oil and Natural Gas Exploration and Production

Revenues from oil and gas activities increased $1,886,000, or 109%, from
$1,727,000 during the six months ended December 31, 1995 to $3,613,000 for the
current period. The increase in revenues was primarily the result of increased
production of oil and natural gas as several oil and natural gas wells which
were drilled began production during 1996, higher oil and natural gas prices for
the current year, and the April 1996 purchase of $6.9 million of oil and gas
properties from an unrelated third party.

Of the total $3,613,000 of revenues for the six months ended December 31,
1996, approximately $3,092,000 was from the sale of oil and gas - 66,980 barrels
of oil at an average price of $23.34 per barrel and 609,613 MCF of natural gas
at an average price of $2.51 per MCF. The remaining $521,000 of revenues
represented primarily administrative fee income and other miscellaneous income.

Expenses related to oil and gas activities increased $667,000 or 108% from
$619,000 for the 1995 six month period to $1,286,000 for current 1996 period.
The increase in expenses was primarily the result of increased production of oil
and natural gas as several oil and natural gas wells which were drilled began
production during 1996 and the April 1996 purchase of $6.9 million in oil and
gas properties.

- 16 -

Oil and Natural Gas Well Drilling

Oil and natural gas well drilling revenues increased $1,024,000, or 28%, from
$3,659,000 for the 1995 six month period to $4,683,000 for the 1996 period. The
increase in revenues is primarily attributable to higher equipment utilization
and an increase pricing structure. In addition, two drilling rigs were acquired
in the March 1996 merger with WellTech.

Expenses related to oil and natural gas well drilling activities increased
$1,109,000, or 41%, from $2,735,000 for the 1995 six month period to $3,844,000
for current 1996 period. The increase in expenses is attributable to higher
equipment utilization and the addition of two drilling rigs as the result of the
WellTech merger.

Interest Expense

Interest expense increased $1,769,000, or 202%, to $2,646,000 for the current
1996 six months from $877,000 for the 1995 comparable period. The increase was
primarily the result of the issuance of $52 million in principal amount of 7%
Convertible Subordinated Debentures, (see Note 3).

General and Administrative Expenses

General and administrative expenses are comprised of the Company's and all
subsidiaries general and administrative expenses. These expenses increased
$4,872,000, or 204%, to $7,262,000 for the current 1996 six month period from
$2,390,000 for the comparable 1995 period. The increase was primarily
attributable to the Company's recent acquisitions and expanded services.

Depreciation, Depletion and Amortization Expense

Depreciation, depletion and amortization expense increased $2,643,000, or 147%,
to $4,437,000 for the current 1996 six month period from $1,794,000 for the
comparable 1995 period. The increase is primarily due to oilfield service
depreciation expense, which is the result of increased oilfield service capital
expenditures for the current period versus the prior period and the acquisition
of WellTech. In addition, depletion expense increased for the period due to the
increase in the production of oil and natural gas.

Income Taxes

Income tax expense of $1,813,000 for current 1996 six month period increased
from $730,000 in income tax expense for the comparable 1995 period. The increase
in income taxes is primarily due to the increases in operating income. However,
the Company does not expect to be required to remit a significant amount of the
$1,813,000 in total federal income taxes for fiscal year 1997, because of the
availability of net operating loss carryforwards, accelerated depreciation and
drilling tax credits.

Cash Flow

Net cash provided by operating activities decreased $1,119,000 from $3,046,000
during the comparable 1995 six month period to $1,927,000 for the current 1996
period. The decrease is attributable primarily to an increase in accounts
receivable and a decrease in accounts payable and accrued expenses.

Net cash used in investing activities increased from $4,244,000 for the
comparable 1995 six month period to $21,065,000 for the current 1996 period. The

- 17 -

increase is primarily the result of increased capital expenditures for oilwell
service operations and cash paid for oilwell service acquisitions (see Note 2).
These increases are partially offset by a decrease in expenditures for oil and
gas properties.

Net cash provided by financing activities was $25,839,000 for the current 1996
six month period as compared to $878,000 in net cash provided by financing
activities for the comparable 1995 period. The increase is primarily the result
of the proceeds from the issuance of the Company's 7% debenture and proceeds
from other long-term debt.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1996, the Company had $9,283,000 in cash as compared to
$3,240,000 in cash at June 30, 1996.

The Company has projected $6.5 million for oilfield service capital expenditures
for fiscal 1997 as compared to $5.2 million for fiscal 1996. Oilfield service
capital expenditures for the six months ended December 31, 1996 of $5.9 million
are expected to significantly decrease through the remaining fiscal 1997 fiscal
year. Capital expenditures are expected to be primarily capitalized improvement
costs to existing equipment and machinery. The Company expects to finance these
capital expenditures utilizing the operating cash flows of the Company.

Odessa Exploration is forecasting outlays of approximately $6.0 million in
development costs for fiscal 1997, as compared to $9.8 million during fiscal
1996. Financing is expected to come from borrowings under its Norwest credit
facility.

Clint Hurt Drilling has forecast approximately $500,000 for oil and gas drilling
capital expenditures for fiscal 1997 primarily for improvements to existing
equipment and machinery compared to $598,000 for fiscal 1996. Such outlays are
treated as capital costs. Financing is expected to come from existing cash flow.

Debt

In July 1996, the Company completed the offering of $52,000,000 of 7%
convertible subordinated debentures due 2003. The Offering was a private
offering pursuant to Rule 144A under the Securities Act. Proceeds from the
Offering were approximately $52,000,000 and were used to substantially repay
existing long-term debt (approximately $35.4 million). The remaining proceeds
were used to fund the expansion of the Company's operations through acquisitions
of businesses and assets, for working capital and general corporate purposes.

The Company's long-term debt that was repaid with proceeds from the
Offering consisted of (i) indebtedness under the term notes with CIT
Group/Credit Finance, Inc. ("CIT") aggregating approximately $21.2 million and
(ii) all indebtedness owed by Odessa Exploration to Norwest Bank Texas, N.A.
("Norwest") totaling approximately $14.2 million.

- 18 -

In addition to the CIT credit facilities, Odessa Exploration has funded its
operations and acquisitions in part through a credit facility with Norwest. All
amounts previously owed by Odessa Exploration under the Norwest facility were
paid using a portion of the proceeds from the Offering. Effective as of January
31, 1997, Odessa Exploration completed the renegotiation of the Norwest credit
facility, which, among other things, increased its borrowing base to $18
million, none of which has been advanced as of February 13, 1997.

Impact of SFAS 121

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 - Accounting for Long-Lived Assets and
for Long-Lived Assets to be Disposed Of ("SFAS 121") regarding the impairment of
long-lived assets, identifiable intangibles and goodwill related to those
assets. The application of SFAS 121 requires periodic determination of whether
the book value of long-lived assets exceeds the future cash flows expected to
result from the use of such assets and, if so, will require reduction of the
carrying amount of the "impaired" assets to their estimated fair values. The
Company implemented SFAS 121 beginning July 1, 1996, (see Note 4).

Impact of Inflation on Operations

Although in our complex environment it is extremely difficult to make an
accurate assessment of the impact of inflation on the Company's operations,
management is of the opinion that inflation has not had a significant impact on
its business.

- 19 -

PART II - OTHER INFORMATION

Item 1. Legal Proceedings
None.

Item 2. Changes in Securities
None.

Item 3. Defaults Upon Senior Securities.
(c) Recent Sales of Unregistered Securities:

The Company effected the following unregistered sales of
its securities during the three months ended December 31,
1996. Each of the following issuances by the Company of
the securities sold in the transactions referred to below
were not registered under the Securities Act of 1933, as
amended, pursuant to the exemption provided under Section
4(2) thereof for transactions not involving a public
offering:

Effective as of October 1, 1996, the Company issued 75,000
shares of the Company's common stock to James McMurphy as
partial consideration for the merger of Woodward Well
Service, Inc., of which Mr. McMurphy was the sole
shareholder, into WellTech Eastern, Inc., a wholly-owned
subsidiary of the Company.

Effective as of October 24, 1996, the Company issued an
aggregate of 61,069 shares of the Company's common stock to
Elvin Brownlee, Jr., Reo Brownlee and Elvin Brownlee III
(collectively, the "Brownlees") as partial consideration for
the Company's purchase of all of the capital stock of
Brownlee Well Service, Inc. and Integrity Fishing & Rental
Tools, Inc., of which the Brownlees were the sole
shareholders.

Effecitive as of November 1, 1996, the Company issued 4,386
shares of the Company's common stock to Energy Air Drilling
Service Co. ("Energy Air") as partial consideration for the
Company's purchase of certain assets of Energy Air.

Effective as of November 15, 1996, the Company issued to
Jack D. Loftis, Jr., pursuant to the Company's 1995 Employee
Stock Option Plan, an option to purchase 25,000 shares of
the Company's common stock (the "Loftis Option") as partial
consideration for Mr. Loftis' entering into employment with
the Company. The exercise price of the Loftis Option is
$11.125 per share and is exercisable under the following
vesting schedule: 6,250 share on each of November 15, 1996,
1997, 1998 and 1999.

On November 22, 1996 (but effective as of September 15,
1996), the Company issued to The CIT Group/Credit Finance,
Inc. ("CIT") as partial consideration for CIT entering into
an amendment of the CIT's credit facilities for certain
subsidiaries of the Company, a Warrant entitling CIT to
purchase 125,000 shares of the Company's common stock at an
exercise price of $7.625 per share (the "CIT Warrant"). The
CIT Warrant is immediately exercisable.

On November 22, 1996, the Company, as partial consideration
for CIT entering into an amendment of the CIT's credit
facilities for certain subsidiaries of the Company, entered
into an amendment with CIT pursuant to which the expiration
date of previously issued Warrant entitling CIT to purchase
75,000 shares of the Company's common stock at an exercise
price of $5.00 per share was extended to September 5, 2003.

- 20 -

Effective as of December 4, 1996, the Company issued 917,500
shares of the Company's common stock to Hunt Oil Company
("Hunt") as the sole consideration for the merger of Brooks
Well Servicing, Inc., of which Hunt was the sole share-
holder, into WellTech Eastern, Inc., a wholly-owned
subsidiary of the Company.

Effective as of August 3, 1996, the Company issued to
Kenneth V. Huseman, pursuant to the Company's 1995 Employee
Stock Option Plan, an option to purchase 50,000 shares of
the Company's common stock (the "Huseman Option") as partial
consideration for Mr. Huseman's entering into a new employ-
ment agreement with the Company. The exercise price of the
Huseman Option is $8.375 per share and is exercisable under
the following vesting schedule: 16,667 shares on each of
August 3, 1997, 1998, and 16,666 shares on August 3, 1999.

Effective as of July 22, 1996, the Company issued to James
W. Dean, pursuant to the Company's 1995 Employee Stock
Option Plan, and option to purchase 25,000 shares of the
Company's common stock (the "Dean Option") as partial
consideration for Mr. Dean's entering into an employment
with the Company. The exercise price of the Dean Option is
$8.50 per share and is exercisable under the following
vesting schedule: 10,000 shares on July 22, 1996 and 5,000
shares on each of July 22, 1997, 1998 and 1999.

Item 4. Submission of Matters to a Vote of Security Holders.
None

Item 6. Exhibits and Reports on Form 8-K.

(a) The following exhibits are filed as a part of the Form 10-Q:

Number Description

10(a) Plan and Agreement of Merger among Key Energy Group, Inc.,
WellTech Eastern, Inc. and Woodward Well Service, Inc.
dated as of September 30, 1996

10(b) Stock Purchase Agreement among Key Energy Group, Inc., Reo
Brownlee, Elvin Brownlee, Jr. and Elvin Brownlee III dated
as of November 1, 1996

10(c) Asset Purchase Agreement among Yale E. Key, Inc., Key
Energy Group, Inc., Energy Air Drilling Service Co. and
Dale Rennels dated as of November 1, 1996

10(d) Stock Purchase Agreement among Key Energy Group, Inc., Ed
Hitt, Helen Hitt, Michael E. Thompson and Edward Monroe,
Jr. dated as of December 2, 1996.

- 21 -

10(e) Plan and Agreement of Merger among Key Energy Group, Inc.,
WellTech Eastern, Inc., Hunt Oil Company and Brooks Well
Servicing, Inc. dated as of November 22, 1996

10(f) Asset Purchase Agreement among WellTech Eastern, Inc., B&L
Hotshot, Inc., McDowell & Sons, Inc., 4 Star Trucking,
Inc., R.B.R., Inc., Royce D. Thomas, John F. McDowell and
John R. McDowell dated as of December 13, 1996

10(g) Asset Purchase Agreement among WellTech Eastern, Inc.,
Talon Trucking Company and Lomak Petroleum, Inc. dated as
of December 13, 1996

10(h) First Supplemental Indenture dated as of November 20, 1996
by and between Key Energy Group, Inc. and American Stock
Transfer & Trust Company as Trustee.

10(h) First Amendment to Third Amended and Restated Loan and
Security Agreement and Modification of Notes dated as of
November 22, 1996 among The CIT Group/Credit Finance,
Inc., Yale E. Key, Inc., Key Energy Drilling, Inc., and
WellTech Eastern, Inc.

11(a) Statement - Computation of per share earnings.
Filed herewith as part of the Condensed Consolidated
Financial Statements).

27(a) Statement - Financial Data Schedule (Filed
herewith as part of the Condensed Consolidated
Financial Statements).

(b) There were no reports filed on form 8-K during the quarter ended
December 31, 1996.

- 22 -

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

KEY ENERGY GROUP, INC.
(Registrant)

By /s/ Francis D. John
President, Chief Executive Officer
Dated: February 14, 1997 and Chief Financial Officer

By /s/ Danny R. Evatt
Dated: February 14, 1997 Vice President and Chief
Accounting Officer

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